OM Holdings Limited (OMH) Earnings Call Transcript & Summary

Very good morning, everyone, and thank you for attending OM Holdings webinar this morning. My name is Jenny from the IR Department of OM Holdings. Together with me is [ Ruiqi ], and we will be hosting this webinar. OM Holdings is a manganese and silicon smelting company with vertical exposure in mining and trading and has just released its full year 2024 financial results last Friday. I'm delighted to have OMH's Managing Director, Adrian Low, with me today. He will run through the key points followed by a Q&A session. If we are unable to answer your question, we'll attempt to address the query post webinar. So without any further ado, I'm pleased to hand over to Adrian. Adrian, please.

Thank you, Jenny. Thanks, everyone, for dialing in to our presentation today. So I'm very pleased to be presenting our FY 2024 results to investors, shareholders and analysts today. Without further ado, I think we could just jump straight into the highlights. So I trust that most people on the call have seen our key numbers. And last year in '24, I think in the last quarterly webinar, we spoke about the production numbers of 2024, and we achieved production numbers of over 0.5 million tonnes of ferroalloys. And I think that's the first time we're doing that in a very, very long time. So I think off the back of that, even with sort of price compression coming in, in the second half of 2024, we saw that revenue grew just over 10%, around 11% from '23 to FY '24. So we closed the year with a revenue of $654.3 million. And from that, we generated an EBITDA of $76 million. So I think in the last couple of years, and this is something that I've touched on a couple of times, we have historically seen very close links between cash flow from operations and our EBITDA numbers. And so I'm very pleased that last year, I think we just saw this cycle normalize itself. And so from that, we generated, see, USD 83.3 million, sorry, excuse me, of cash from operations. So most of the cash that we generated last year went into loan repayment. So I think this is really just a feature of how the Project Finance works. And I'll touch on that. And if there are questions about this, we can take them at the end. But the long and short of it is that most of the cash generated from operations went into loan repayment, so $66.1 million. And we are in the last 2 years of that facility. So that will continue until a balloon repayment in 2026, sometime towards the end of the year. And so from the earnings, that represents $0.0122 of profit per share. And as we have announced, we're very pleased to, for the first time in a couple of years, announce a dividend for shareholders. Next slide. So I think a better way to understand the earnings and EBITDA is to look at the price chart, and I've talked about this in the last webinar we had at the quarterly. But I think it sort of bears mentioning now how things sort of played out in FY '24, right? So ferrosilicon, as you can see in the chart, it's incredibly flat. The blue line is almost no discernible features when you look at it from sort of this vantage point in 2017 until today. But there has been a gradual decrease in price in the first half of the year before it sort of picked up a bit. But I think ferrosilicon is at an interesting point today because I think when you look at coal prices in China, coal prices in China, those are still coming down. When we look at the procurement costs of things we have purchased in Q1 compared to budget, we are looking at numbers $50 to $100 per metric ton lower. So I think there's room to go, and that's why we expect continued near-term pressure for ferrosilicon. Now it's no longer about the sort of supply side story, but really costs are coming down. And so we will see this obviously reflected in our costs as well, right, with a lag because by the time the raw material arrives, it takes 2 or 3 months before you recognize it into the cost of goods. So I think that's actually a good thing for us. And as I've said, over the last couple of years, when base prices are low, it doesn't necessarily imply that profitability is low. You really have to see what's the -- what the recent price history of raw material prices look like. For the manganese alloys, last year was segmented quite distinctly into 2 halves. In the first half, we saw force majeure event from South32 that led to really a lot of near-term increase in prices, both on the ore and the alloy side. And I think the company very rightly capitalized on sort of selling its products as much as we could at that point in time to sort of capture that bull market. At the same time, we had also hedged to a large degree our ore costs. And so you see that profitability in the first half of 2024 was a fair bit higher than the profitability in the second half of '24. So I'll talk more about that when we get to the next couple of slides. In terms of where things stand today, I think really, we are -- normalization is a word that I've used, I think second webinar. But I really do think that that's where we're heading. At some point in time this year, we expect ore supply from Australia to normalize. We expect manganese ore prices to normalize. And when we say normal manganese ore prices, what we really mean is they should be firmly between $4 to $6 and really more or less at the midpoint. And if you look at historical sort of silicon manganese alloy prices, that generally corresponds to prices above magnitude of USD 50. And then that's where we see things moving to date. So those are all sort of healthy signs for the market and for earnings. And in terms of ferrosilicon, really, I think we have to see where coal prices go, where sort of reductant prices go before we see what those sort of bottom of market prices look like and then from there, expect an uplift. So in terms of the chart's guidance for the year, we've done that in the webinar, so -- the quarterly webinar, excuse me, so I won't go through them again. But we are looking at a smidge lower in terms of production numbers compared to FY '24 off the back of maintenance, not on our side, but really in terms of power supply, okay? So both silicon metal furnaces have also been switched to producing ferrosilicon and they are currently run on ferrosilicon. I think when we look at the silicon metal market today in terms of really sort of commodity grade products, it's still under a lot of pressure, and we will continue to monitor, obviously, both ends and evaluate the profitability of both product lines. So in FY '24, I think we closed the year with GP margin 17.3%. For people who are looking at this on a sort of half yearly basis, and we've got this question from analysts as well. Back to what I was saying earlier about the manganese prices being quite distinctly different in the halves. I think we saw GP margins in the first half of 2024 really reaching close to 20%. So that was actually a very, very sharp increase from FY '23, where the second half was much poorer than the first. So for 2 years now, right, we've seen this pattern where the first half, we see a very high level of profitability before it declines due to price cycles, and it just happened that sort of the shorter cycles were in sort of 6-month intervals and before sort of declining in the second half of 2024 to a level close to 15%. So that makes for a full year of 17.3%. And I think if you look at the EBITDA of $76 million for the year, so first of all, I think maybe close to 60% of that was made in the first half and the remainder made in the second half. And -- but I think more interestingly, when you look at the composition of earnings, the contribution from smelting, from trading has become a lot more stable. The structure, I think, is becoming apparent. And so I think that is a sign of stability. That's also a sign that the way the business has been designed to function, it's functioning in the right way. Unfortunately, mining remain on the care and maintenance last year. So it recorded a negative contribution very marginally. And that is something that the company is looking to turn around and restart in FY 2025. So to conclude in terms of what that means for cash, gearing ratios have come down. I think it's been on a continuous downtrend, which is only to be expected. That has been the company's focus over the last 6 to 7 years, and that's something that we've repeated. We are at a point today where in the last 12 months, we've repaid $66.1 million, largely comprising of Sarawak's Project Finance loan. And that's where most of the cash was spent. We closed the year with more or less the same level of cash that we started the year with. But we are also at a point today, I think, that I've highlighted in the past, really looking at what the optimal capital structure ought to look like, how should we be treating our debts because the chunk of the debt that we are sitting on today ostensibly was taken on for the purpose of the construction of Sarawak, and we celebrated our 10th year anniversary last year. So that in one shape -- some shape or form has to continue. Obviously, we have to be -- we look at a sort of optimized capital structure, sort of bearing on the side of caution and prudence, but still, debt has a part in this. But what should that look like, what sort of maturities should we be targeting, I think that's something that the company is exploring and looking at. So I think with that, we will go into the summary slide. And again, this is a snapshot that we like to do, so everyone has a good sense of what the total picture looks like. And I won't talk too much about the slide, but I think we do have a long list of questions. So let's leave more time for the Q&A.

Great. Thank you very much, Adrian, for the presentation. We will now move on to the Q&A session. So the first question relates to tax. It seems rather high for the company to record an income tax of $8.2 million against a PBT of $17 million. Would you be able to explain on this?

Sure. Yes. So I mean, really at face value, you should not be taking that number dividing it by profit after tax because there are sort of deferred tax expense components, sort of noncash components to it. And really, I think if you look at the notes to the FS, that's all explained and set out. So what I would suggest is if you look at those notes and look at the cash portion, that's actually going to be paid as taxes, divide that by income, then you will arrive at a number that's much closer to the tax rates that's levied on us. So in Singapore, that will be 17% and then Malaysia, it's 24%.

Right. Thank you, Adrian. Now the second question is on inventories. I think we have received a fairly -- quite a fair bit of questions on inventories. So they all revolved around the similar nature. So I think investors really want to know like what are the breakdown for inventories and because it seems a bit high on our balance sheet. So would you be able to give some insights into the inventories levels as of 31st December 2024?

Yes. Sure. So look, I think the inventories consist of raw materials, finished products and power, right? And we have shared the power component of inventories in the past. It's not the vast majority of that inventory figure. So we can't share too much about that because of the confidential nature of our agreement with Sarawak Energy. But I think if you just look at inventories as a broad category, that probably went up by like $20 million from where we started the year in 2024 to the end of the year. And a vast majority of that can be -- of that increase to be precise, can be explained by higher raw material inventories. And that's because at the end of last year, the company took the decision to buy a bit more manganese ore and on account of maybe just lower oil prices at that point in time and deferring certain sales from December into January and February because of where market prices were. We're not in a position -- we're not in the business of speculating on the market. But if we have the opportunity to buy one more month of ore, delay one more month of sale, we will occasionally make those decisions technically. And I think that's really paid out, right? Because I think if you look at the ore prices at the end of last year, it was probably something like $4. Today, just in March, I think it's increased by more than 15%. So that's a 15% saving in the cost of inputs for production. And likewise, you will see that reflected in the sales and the selling prices as well. In terms of finished products, I don't believe that, that increase in inventory value is significant. But obviously, it might play a part in that $20 million increase year-on-year.

Thanks, Adrian. Now the next question, I think you have briefly touched on during the presentation. This question is on the company's debt. So this question is on whether -- do you have any general thoughts on financing, for example, long-term versus short-term debt and when to refinance the project debt?

Yes. So obviously, I think this is top of mind. And like I said earlier, we've passed our 10-year anniversary, but the Project Finance in its original state, obviously extended a couple of times for the various expansion projects that we have done. So just very, very briefly, we count in 2016 to 2017, we converted 6 furnaces from ferrosilicon to manganese alloys, right? And very, very successfully so, we caught the market at the right time. And 2017 and 2018 for shareholders who were around then were really, really good years. Post that, we then did another round of sort of furnace upgrades, furnace conversions, 2 furnaces to metallic silicon and then 2 more furnaces to ferrosilicon. And obviously, in between major maintenance, although that's not really an item that you would typically consider to be funded by long-term debt. So what I'm trying to get at is through this long period, we've actually used a single debt instrument, the Project Finance as a financing -- as a funding tool to fund all of these things, right? And I think at the group level, if you look at sort of debt that doesn't sit at the Sarawak asset level, if you look at debt that's sort of at the holding sort of operating -- intermediary operating company levels, then those debts were also taken on as sort of short-term debt by really financing things like the need to have more inventory, right? Also the need to have sort of not the entire portion, but part of the portion that went towards the acquisition of 25% stake in OM Sarawak a couple of years back. So I think what the company -- what the company -- as company matures from really a greenfield project into a steady state, really, I think at this point in time, a top 10 gold producer of these products, if not top 5, we really need to look at sort of making sure that long-term debt is financing sort of long-term assets and short-term debt is financing short-term working capital needs, inventory turnaround like last year when we had sort of 2-month requirements, 3-month requirements for manganese ore that all these things have to be sort of lined up. And I think perhaps it's something that we try to do, unfortunately, just prior to COVID. So that set plans back a bit, and then here we are 5 years on, but I think that's something that we really need to examine and restructure because the current state of the Project Finance obviously places a lot of restrictions in terms of how you can deploy working capital, how those lines are made available to you and what things -- what cannot be done at the assets. So I think that's something that, again, is a focus of the company this year. I've mentioned this at the quarterly webinar and sort of unpacking that from the current financing structure will also be a key priority for 2025.

Right. Thank you, Adrian. I think we have reached the very last question. So this is more on the macroeconomic side of things. What are the impact of U.S. tariffs for OMH on the business?

Yes, sure. Those -- I mean this is a very straightforward question, and we received this question several times in the last couple of weeks. The long story short is that the immediate and near-term impact is positive because our customers are steelmakers in the U.S., and they are enjoying a period of strength really at this point in time. And we have been supplying them since we pivoted into the U.S. with about 10% of our sales, really not the bulk of our production. And we are seeing the fruits from that move. And I think in the last couple of weeks as well, some customers have reached out to really just top up their purchases and commit towards purchasing larger volumes in the year. And I think if you look at the price differential in the U.S. and Asia, because of the way we are shipping, because of the way we are able to load 3 products, I don't think there's a single producer in the world that is loading 3 different alloys to the U.S. today because of the way we're able to organize those logistics, the scale at which we're operating, the amount that we are selling into the U.S. is not small, but it's only 10% of our output. Those returns, I think, at any given point in time, in the last 2 months or so would be between $50 to $100 higher than the general return in Asia. And obviously, this is not any specific customer, any specific product, but really just -- you can't win all of them. You win some and you lose them. But if you look at it on an aggregate basis, that is the returns -- those are the returns, sorry, that we're looking at. So for now, it's positive. Obviously, we are also, at the same time -- it's not all sun and roses. We're also awaiting the results of the antidumping investigation of ferrosilicon into the U.S. We've put up a credible defense. We've submitted the final sort of rebuttals and sort of counterpoints. And yes, we look forward to hearing and seeing the results of those as well.

Right. Thanks, Adrian. So that appears to cover the majority of the questions from our audience today. If you do have any further questions, please forward them to [email protected]. We will make a recording of this webinar available via OM Holdings LinkedIn in the coming days. This concludes our webinar for today. Thank you, everyone, for attending, and thank you, Adrian, for the comprehensive update.

Thank you. Thanks, everyone, for dialing in. Thanks, Jenny.